The Last Days of MF Global

June 6, 2012 3:43 PM

The Last Days of MF Global

Because MF Global wouldn't technically own the bonds during their term—they'd be given to the lender as collateral until they matured, when MF Global would repurchase them—it wouldn't have to publicly report swings in the bonds' value. But here's what was really appealing about this arrangement: Under accounting rules, MF Global could book the anticipated profits from the entire transaction up front, boosting its quarterly earnings. If the trades were big enough, they could make MF Global profitable. And they wouldn't even appear on the firm's balance sheet as debt.

A detailed article about the events that led to the downfall of MF Global.

Previously

posted by Guernsey Halleck (28 comments total)

Detail kind of obfuscates the most amazing thing on this one. They stole $1.6 billion from their customers and it isn't even clear if any of the executives will be criminally charged for it. If only they had robbed a 7-11 instead.

As of April 2012, no charges have been brought against Corzine, or any other of MF Global's former executives or employees.
posted by furiousxgeorge at 3:52 PM on June 6, 2012 [2 favorites]

furiousxgeorge: If only they had robbed a 7-11 instead.

To try to put the crime in scale, this would probably be roughly comparable to stealing all of 7/11. Not just the inventory, the stores.
posted by Malor at 3:57 PM on June 6, 2012 [4 favorites]

You've got to admit, the name "MF Global" is pretty awesome for a crooked investment bank that went belly up over eurobonds.
posted by delmoi at 4:00 PM on June 6, 2012 [1 favorite]

"Everything's fucked up, and nobody goes to jail. You can end the piece right there."
posted by vidur at 4:05 PM on June 6, 2012 [4 favorites]

Every time I see "MF Global" in print I think of this guy.
posted by elwoodwiles at 4:08 PM on June 6, 2012

"Everything's fucked up, and nobody goes to jail. You can end the piece right there."

I was kind of psyched for the the sequel to Oliver Stone's Wallstreet. The problem, though, was at the end. He pulled his punches. (BTW, spoilers if you care, which you probably don't) The "Bad guy" gets it in the end and goes to jail, ostensibly over some kind of insider trading or something. And it came because some information leaked on one of the character's blogs.

But in the real world, the stories of bad acts get printed in the NYT, and nothing happens. If the movie had been true to life, the story would have blown up for a couple days, the public would be outraged, and that would be that. Maybe the guy would step down, but probably not.

The other funny thing about this is how a lot of democrats were rallying to Corzine's defense. I'm sure his status as a former Goldman Sachs CEO hurt him in the election, but he was actually calling Chris Christie a criminal. Now all you hear about is how Corzine might be one (Although it sounds like he insulated himself from any technical illegality pretty well)

Anyway, the only cool thing about Money Never Sleeps was actually just the scene in the trailer where Gordon Gecko gets back his DynaTAC. The rest of the movie kind of bit, and like I said, actually made the world of wallstreet less shady and powerful then it really is. .
posted by delmoi at 4:27 PM on June 6, 2012 [2 favorites]

Jon Corzine and JP Morgan Chase are criminals, and are being protected by their political connections. Everything else is just noise. It's unbelievable.
posted by fet at 4:31 PM on June 6, 2012

Why do you people insist on looking backwards, not forwards?
posted by T.D. Strange at 4:35 PM on June 6, 2012 [4 favorites]

Oh great, now we're going to have to watch a whole bunch of Republicans talking endlessly about 7/11...
posted by Chuffy at 4:46 PM on June 6, 2012 [1 favorite]

Jon Corzine and JP Morgan Chase are criminals, and are being protected by their political connections. Everything else is just noise. It's unbelievable.

Meanwhile, John Edwards gets prosecuted for non-crimes that didn't hurt anyone (except perhaps old lady donor who may not have known what the money was for). Obviously Edwards was a scumbag of the first order (and betrayed his supporters), but clearly, and now "officially" not a criminal.

Maybe if Corzine had gotten someone pregnant, and use some of the MF Global cash to pay for his baby moma he'd be in jail.

On and then of course there's Raj Rajaratnam who's in jail right now. A guy who, in effect, stole from Goldman Sachs (stole information, anyway). His insider trading had nothing to do with the collapse, while on the other hand Goldman paid a fine over trades that were directly related to the collapse and Fabrice Tourre, the guy responsible faced no criminal liability at all, as far as I know.
posted by delmoi at 4:49 PM on June 6, 2012

Memo to self:

Don't buy stock in companies that recently fired the risk officer, and look out for trades that have 'accounting benefits'.

Also it really isn't a concern until I stop spending my whole paycheck.
posted by poe at 5:04 PM on June 6, 2012 [3 favorites]

Sad. Samuel L. Jackson was their spokesperson.

"Buy their MF Gold!"
posted by clvrmnky at 5:04 PM on June 6, 2012

I'm halfway down this article and I have yet to see anything I'd call 'criminal'.

There is definitely some shady accounting that should be made illegal, and erratic behavior that should be reported or regulated more heavily, but I'm pretty sure it is totally legal to run your company in a crazy way.

I think it should be possible to sue you into the ground for such erratic behavior, but I don't think it should be illegal.

Is there something I don't adequately understand about the legal responsibilities of a CEO?
posted by poe at 5:27 PM on June 6, 2012

Don't buy stock in companies that recently fired the risk officer, and look out for trades that have 'accounting benefits'.

Aas far as I can tell the people who got ripped off here weren't ordinary investors buying shares of MF Global on an exchange. The problem was people who hired MF global as their investment manages. MF just straight up stole their money. Not to keep, but rather to cover their risky investments. And when the investments got worse, their clients lost their money too!

So from the perspective of a regular investor, lets say you use E*Trade. You can Buy their stock on the market if you want, and during 2009. it looked pretty risky. In '07 their shares were about $200, and by early '09 they were down to about $6. Pretty terrible! I think they actually were involved in doing mortgages during the bubble, or something and there was some talk about them maybe going bankrupt in the aftermath of the colapse.

But, if you were just using E*Trade to buy other stuff, there's no problem. You just keep using them and worst case you might have some interruption of service if they did go under. Maybe you sold all your stocks and bought a bunch of gold ETFs or just cashed out and have a large balance in your brokerage account. So you, personally have nothing to worry about, right?

Well, lets say E*Trade's losses on mortgages are really bad. And let's say E*Trade decides, you know what, everyone's cashed out of the market, they're leaving a hefty balance in their in cash, just sitting there. Maybe this mortgage thing won't be so bad: why don't we just take the money sitting in these brokerage accounts and use them to buy up more mortgages at these super low prices! Then when they go up, our losses will be covered!

Then, when the mortgages don't recover you lose all your money.

That's what MF Global did (from what I understand). They pretty much, well, just straight up stole their clients money! Just like if E*Trade took money out of your brokerage account or your bank took money out of your savings account just so they could, metaphorically speaking, head to Vegas and spin the wheel one more time hoping to put the money back and cover their extant casino debt.

---

Also, the other thing to remember is that when you talk about the "Average Investor" you're not even talking about someone investing on E*Trade: you're talking about people who have 401(k)s or whatever, and you end up having maybe a choice of a handful of funds to pick from.

It really irritates me, you know, you'll be watching CNN or something and they'll mention some horrible oil company and then talk about how "If you're sitting at home chances are you own some of this stock in your retirement account!" but chances are no one ever chose that, the choice was made for them.
posted by delmoi at 5:30 PM on June 6, 2012 [7 favorites]

This is a classic case of embezzlement. The typical embezzler is a gambling addict that gets in a little over his head and has a cash flow problem. The bookie is threatening to break his legs so he takes a little cash out of the till to cover his bets with every good intention of putting it back in the morning before anyone notices. But, as in a B-hollywood movie script, he can't resist making one more bet to make it all back and instead it all blows up.

In the movie, he goes on the lam and ends up in jail, but on Wall Street he quietly retires to the Hamptons and lives happily ever after.
posted by JackFlash at 6:25 PM on June 6, 2012 [4 favorites]

There's nothing shady about this deal (other than the client funds used for prop trading/margin calls/whatever) as far as the repo is concerned. At least not any more than the rest of our crooked-ass financial system.
posted by wierdo at 6:44 PM on June 6, 2012

They should never name anything that could be confused with "motherfucker".
posted by paladin at 7:06 PM on June 6, 2012

I don't know how commodities brokers are regulated in the US, but do the officers and directors have a legal responsibility to ensure that controls are in place to prevent customer money being accidentally spent elsewhere? Something like SarbOx for customer money?
posted by atrazine at 7:19 PM on June 6, 2012

It really irritates me, you know, you'll be watching CNN or something and they'll mention some horrible oil company and then talk about how "If you're sitting at home chances are you own some of this stock in your retirement account!" but chances are no one ever chose that, the choice was made for them

Yeah, I don't have the time or personality to manage my investments very actively, so I mostly park my retirement account money in S&P index funds or spiders. I've often thought about have a separate investment account just to short my position in specific companies that I don't want to be invested in (mostly for moral rather than practical reasons), but I really don't want to get short squeezed at some point, and don't want to constantly be buying options to minimize my total liability (if that can even be done without transaction costs ruining the whole thing).

On the other hand, hiring someone to actively manage your investments so that you can choose what you are investing in seems to mean that they are going to constantly lose you money in the long term through transaction costs, fees, etc... no one beats the market, and trying to beat the market plus cover the investment fees so the client doesn't see their principal erode year after year appears to force high risk investment behavior.
posted by BrotherCaine at 7:21 PM on June 6, 2012

Jon Corzine and JP Morgan Chase are criminals

Don't worry though, they got Kwame Brown for his outrageous fraud. (He overstated his income by tens of thousands of dollars!)
posted by furiousxgeorge at 7:45 PM on June 6, 2012 [1 favorite]

Classic revisionist history when government institutions decide winners and losers.. If the MF Global book of European Sovereign Bonds was on the books today... he's a fucking genius. Tell that to your Uncle Larry.
posted by vozworth at 8:08 PM on June 6, 2012

paladin: "They should never name anything that could be confused with "motherfucker"."

MF Global isn't as bad as MoFo, which is a totally legit and respectable law firm.
posted by Copronymus at 10:04 PM on June 6, 2012

The key to understanding MF Global and Wall Street in general is that it all depends on leverage. Most Wall Street deals are like blackjack. A skilled player has a very tiny edge and if you play enough hands, you can come out ahead.

There are a lot of good card counters in Las Vegas, but very few actually do it for a living. That is because it is tedious, soul-draining work. Because you have such a tiny edge you have to play 8 hours or 12 hours a day to make a few hundred dollars. You can get by, but it wears you out and you aren't going to retire on your winnings.

The way to turn a small margin game into a real living is to leverage up. You put up a small amount and you borrow 30 times or 50 times that amount to cover your huge bets. You have to find a backer that will lend you lots of money so now you aren't playing $10 blackjack -- you are playing $500 a hand blackjack. That's leverage.

That is how MF Global and Wall Street work. They are gambling with huge leverage using other people's money -- billions of dollars at a time. That is the only way to transform a low margin trading business into one that pays million dollar bonuses.

Everything works fine until you get a string of bad hands. It happens even to the best blackjack players. Even though you have a huge leveraged stake, you are no better off than the $10 player because while your winning hands are big, you losses are leveraged just as much. Eventually you get enough bad hands in a row that you lose your entire stake. Even if the very next hand is a winner and your luck is about to change, it makes no difference. If you are out of money, you can no longer play.

But before that happens, your backer sees that your stack of chips is shrinking and he gets nervous and wants you to put up some collateral for insurance -- your house, your car, your wedding ring, but you never touch the kids college fund.

The same thing happened to MF Global. Their London clearinghouse saw that their bets were heading south and demanded cash as collateral. If they couldn't come up with the cash, their lender would take all their bets off the table and they would have no way of ever paying off their debts. The game would be over.

So they panicked and did the one thing you never, ever, ever are allowed to do. They raided the customer account; they tapped the kids college fund. They only planned to take out the money for a few hours until some of their bets paid off and they could put the money back, but at the end of the day they were $1.6 billion short.

This is theft and a crime, pure and simple. You don't take $1.6 billion out of a customer account by accident. You have to write an order to the bank to remove that money. The minute you touch that money you know you are doing something illegal and dangerous.

The root of the problem is leverage. If you allow banks and traders to leverage up low margin bets, they always eventually will blow up. If you have too much leverage, you don't have enough assets to cover your bets if your luck goes bad. But the way incentives are designed, the traders don't care. They just have to take home $10 million bonuses for a few years and if it blows up, they are still set for life and someone else is left paying to clean up the mess.
posted by JackFlash at 10:30 PM on June 6, 2012 [10 favorites]

And JP Morgan's hands aren't clean in this mess either. They handled the bank accounts for MF Global and they also noticed that sums that mysteriously appeared in the MF Global house account came out of the customer account. JP Morgan handled all the accounts so they could see what was happening.

When accounting was done after it was all over, they identified hundreds of millions of dollars in JP Morgan's possession that had come from the customer account. Even though this is stolen money, they are refusing to return it.

Now, if you are so unlucky as to buy a car from a car thief, even in good faith, the police will come and take that car back and give it to the rightful owner. Tough luck for you. But that is not the way Wall Street works. JP Morgan gets to keep the stolen money and the victims can do nothing about it.
posted by JackFlash at 10:32 PM on June 6, 2012 [4 favorites]

^Why do you people insist on looking backwards, not forwards?

I don't know. Looking back at my life, times and the people whp were around me, I'm still trying to make sense of most of it. 'Backwards' is sort of forward, in this sense -- as in, he who fails to learn lessons from his or her past is destined to repeat them, insanity and all that..
posted by vhsiv at 9:26 AM on June 7, 2012

'Backwards' is sort of forward, in this sense -

And of course Twirling twirling twirling towards freedom
posted by delmoi at 4:48 PM on June 7, 2012

"Detail kind of obfuscates the most amazing thing on this one. They stole $1.6 billion from their customers and it isn't even clear if any of the executives will be criminally charged for it. If only they had robbed a 7-11 instead."

Is this really true, though? I know people went to jail after the S&L crisis - what did they go to jail for? Did MF Global technically break the law, or did they just use the rules and laws the financial industry has lobbied for to clean out their customers before folding.

It seems clear that financial firms now have a license to outright steal from their clients. However, it's not clear to me if that's actually illegal these days.
posted by heathkit at 6:35 PM on June 7, 2012

Ok, maybe I should have just read the wikipedia article first.

"James Koutoulas, an attorney working on behalf of MF Global's brokerage customers after the company's bankruptcy, stated in April 2012 that "Crimes have been committed here without a doubt. We think there are enough facts out here to start arresting people and start filing charges." [59] As of April 2012, no charges have been brought against Corzine, or any other of MF Global's former executives or employees."
posted by heathkit at 6:38 PM on June 7, 2012